Merlin Properties SOCIMI S A : Annual Report. Interactive

ANNUAL REPORT

2 0 2 3

ANNUAL REPORT

2 0 2 3

DATA CENTERS

now fully operational and delivered

to anchor tenant

CLOUD STORAGE

AND GENERATIVE AI

will drive future earnings growth

and value creation

ANNUAL

REPORT

2 0 2 3

Letter from the Chairman 06

1

3

5

7

9

11

13

Organization	2	Business
and structure		performance
10		20

Investments, divestments	4
and capex		Portfolio
30		valuation
		34

Financial	6	Post-closing
statements		events
38		46

EPRA	8	Stock Exchange
Summary		evolution
48		56

Dividends	10	Treasury
policy		shares
60		64

Outlook / R+D	12
information		Sustainability
66		68
	Appendix
Staff	• Alternative performance	131
104	measures
	• Reconciliation of the alternative	134
	performance measures
	• List of assets		136

6 | Annual report | 2023

Javier García-Carranza

Non-Executive Chairman

Letter from the

Chairman

The highlight of the year was the successful launch of our first three Data Centers, a category of assets that represents the future of the company

Dear Shareholders,

I am pleased to present to you the 2023 MERLIN Properties ("MERLIN" or the "Company") Annual Report. The Annual Report details the Annual Accounts and all relevant information relating to the financial year 2023 in a very detailed manner.

The year 2023 has been characterised by the ECB's interest rate hikes, which since July 2022 have been followed by ten consecutive rate hikes to 4.5% in September 2023, a level not seen since 2001. This has been reflected in the containment of inflation, which has been kept at a year-on- year rate of 3%. Spain's GDP grew 2.5%, exceeding initial forecasts, with a solid employment rate and consumption levels quite positive.

Shareholder value creation is a combination of operational excellence and anticipation of real estate cycles with asset rotation. Our sector is by definition a very capital-intensive sector and therefore very sensitive to interest rate levels. Although our rents are indexed annually to inflation, the value of the assets is fixed by the rate at which they are discounted. Consequently, we have faced a high level of interest rates in 2023 which has affected the value of our assets and our cost of financing in the long term. This decline in asset values has been partially mitigated by good operational management which brought the portfolio's occupancy rate to 96.2%. All in all, it was a negative year in terms of net asset value (NTA per share) despite the team's efforts to create value in operational management.

This operational value creation is reflected in its key operating metrics and, more importantly, in all the asset categories in which it operates. This year we have seen how MERLIN achieved growth in rents and occupancy. At consolidated level, the Company achieved gross revenues of € 475.6 million and cash flow generation ("FFO") of € 284.2 million or € 61 cents per share, a growth of 9.6% vs. 2022, after excluding the effect of the sale of 662 branches to BBVA, formalised in June 2022.

By business segment, offices ended the year in line with forecasts. Occupancy stood at 92.5% and we had a significant increase in rents in comparable terms of 6.1%. Rents of € 254.8 million

MERLIN Properties

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and the renovation of the Ruiz Picasso 11 building completed, bringing the Company's Landmark Plan to an end. The entire asset is leased to clients such as IBM, SAP, Globant and Willis Towers Watson.

In logistics, MERLIN achieved organic growth (+4.6% like-for-like) thanks to full occupancy, indexation and higher rents in renewals (+5.2%). Rents for the year amounted to

• 80.3 million and occupancy reached an all-time high (99.0%). As for the progress of the Best II & III plans, 478,000 sqm have been developed since the launch of both plans, with an average return on development cost of 7.8%. In 2023, Cabanillas Park II B, of 47,342 sqm, was completed and leased in its entirety to Pepco. In addition, MERLIN has an aggregate land reserve of approximately 557,000 sqm, which will help to keep pace with the growth of this market segment in the coming years.

Likewise, in shopping centres, an asset category that has been raising concerns in the investment community for years due to the increasing penetration of digital sales, MERLIN's portfolio of shopping centres has reported positive figures in 2023. Footfall at the centres has exceeded expectations, achieving 5% growth. This asset class closed 2023 with gross rents of € 125.8 million, comparable rents up 7.7% compared to 2022 and occupancy of 96.2% (up 122 basis points compared to 2022).

The highlight of the year was the successful launch of our first three Data Centers in the last quarter of 2023, a category of assets that represents the future of the company. The first phase of the data centre development plan includes an installed capacity of 60 MW, a total investment of approximately € 565 million and an expected net return on investment of more than 10%. Of the total investment, € 258 million has already been disbursed and € 307 million remains to be invested, of which € 144 million will be incurred in 2024. The Madrid- Getafe, Barcelona PLZF and Bilbao-Arasur data centres are fully operational and delivered with the best technical specifications in the industry today (1.15 PUE and 0.0 WUE). They have an initial installed capacity of 9 MW and

capacity to install a further 51 MW in 2024 and 2025. In addition, the Lisboa-VFX data centre has just been licensed. Given the increased demand from generative AI, the Company

is accelerating the acquisition of critical equipment and repowering the facilities that allow it.

The significant deleveraging achieved in 2022, following the sale of the branch portfolio to BBVA, has been highly valued by the financial market and especially by rating agencies, in this context of high interest rates. MERLIN closed 2023 with a low debt level of 35.0% and has refinanced all debt maturing in the near future, so the Company does not face new debt maturities until November 2026. MERLIN's credit quality has been recently assessed by Standard & Poors, which, in its annual review carried out in the first quarter of 2024, has raised the Company's rating one notch to BBB+. Regarding the valuation of the asset portfolio, MERLIN Properties' valuation was

• 11,270 million, which represents a decrease of
  3.4% on a comparable basis, mainly due to the increase in yields of 42 basis points on average experienced in asset valuations as a result of the aforementioned interest rate hikes.

Regarding the dividend, an interim dividend of € 20 cents per share was agreed, which together with the dividend to be submitted for approval at the General Meeting, would bring the total distribution for 2023 to € 44 cents per share.

In 2023 MERLIN continued its progress in environmental sustainability. The green clause has been created and implemented in all the Company's new contracts. Maximum embedded carbon footprint limits have been established for new developments

or comprehensive refurbishments. A total of

14.9 MW of PV power has been installed since the launch of the so-called Sun project and the carbon footprint of the asset portfolio has been reduced by 6.1% to a total of 2,422 tonnes in the year. This good environmental performance has been endorsed by MERLIN Properties' inclusion in the Dow Jones Sustainability Index, the first Spanish real estate company to achieve this.

8 | Annual report | 2023

Improvements in corporate governance have also been implemented. MERLIN has a robust governance system, in line with its values of ethics, compliance and transparency, backed by independent third-party validation. In 2023, the corporate governance system was simplified, the information security policy was approved, in line with obtaining 27.001 certification, the management of the whistleblower channel was outsourced, and the documentation and verification of the internal control system for non-financial information (SCIINF) was carried out for the first time. In short, 2023 has been a difficult year for MERLIN, requiring a strong focus on operational management to compensate for the drop in value of our assets. Although the result was not ideal, it was the result of a lot of hard work in

a difficult market environment. On the other hand, the foundations have been laid for a new growth area that we expect to contribute significantly to value creation in the medium term and that will give MERLIN exposure to sectors with high growth expectations, such as Artificial Intelligence or Cloud data storage technology.

Once again this year I would like to thank the Board of Directors that I have the honour of chairing, the employees, suppliers and all MERLIN Properties stakeholders for their trust and dedication, and especially the shareholders for their confidence and support without whom everything we do would not be possible.

Thank you very much.

AT A GLANCE

• Strong year at an operational level, with overall rents growing at +6.5% LfL and FFO up +9.6% pro-forma
• Succesful delivery of Plaza Ruiz Picasso 11, Cerro de los Gamos and 3 Data Centers; while completing all urban planning milestones for our logistics landbank to be fully ready-to-build
• The company has met the updated guidance on FFO and has achieved strong operating performance in all key metrics, reaching record high occupancy (96.2% +110 bps YoY)
• The slightly negative Total Shareholder Return (-1.0% YoY) reflects the significant yield expansion (+42 bps YoY to 5.1%). Since FY20, passing yields have expanded by 95 bps

FFO PER SHARE / AFFO PER SHARE

FFO guidance met; almost compensating the

effect of 1H22 rents from BBVA		FFO ps		AFFO ps

€ 0.61 (-2.1% YoY)	+9.6% PF
FFO ps	Excl. Tree disposal

€ 0.56 (-2.9% YoY)

AFFO ps

0.67		0.62
		0.61
		0.58
0.65	0.56

		0.55	0.58	0.56
	0.53
2019	2020	2021	2022	2023

EPRA NTA PER SHARE
EPRA NTA impacted by the yield expansion and		EPRA NTA ps
the cash dividend distribution (€ 0.44 per share)

€ 15.08 (-3.8% YoY)
					16.11	15.67
EPRA NTA per share evolution
15.39	15.46			15.08
-3.4%
LfL GAV evolution
2019	2020	2021	2022	2023
FINANCIAL DEBT
Solid financial structure, no maturities in 2024
			Loan to Value			Cost of debt (hedged)
and the 2025 bond (€ 600m) is already covered

35.0%

Loan to Value

2.71% spot (2.38% hedged)

Cost of debt

39.5%	39.9%	39.2%		35.0%
			32.7%
2.09%	2.12%	2.07%	1.98%	2.38%
2019	2020	2021	2022	2023

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ORGANIZATION AND STRUCTURE